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Canadian economy slows, sets stage for disappointing second quarter

Construction work being done on a condominium construction site at Bathurst Street and Fork York Blvd. in Toronto on May 29, 2012.

Deborah Baic/Deborah Baic/The Globe and Mail

Canada's economy slowed in May and probably won't pick up enough speed to make a meaningful dent in the unemployment rate.

Economic growth slowed to just 0.1 per cent in May, according to Statistics Canada Tuesday, following a healthier pace of 0.3 per cent in April.

A boost in the mining and oil and gas sectors, along with growth in retail sales, headed off declines in other areas such as manufacturing.

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Some economists are now shifting their forecasts, expecting the next report to show second-quarter growth of between 1.5 per cent and 2 per cent, down from earlier estimates.

That's not "terrible,"said CIBC World Markets chief economist Avery Shenfeld, but it won't help bring down an unemployment rate last pegged at 7.2 per cent.

Mr. Shenfeld projects second-quarter growth of 1.8 per cent, matching the Bank of Canada's forecast in its July Monetary Policy Report.

May's economic performance gives the central bank one more reason to hold its overnight benchmark interest rate at the current 1 per cent.

But further weakness could push unemployment higher and pressure the bank to hint at further monetary easing, said Paul Ashworth, the chief North America economist at Capital Economics in Toronto.

Weak export demand from faltering economies around the world is likely to suppress economic growth in Canada in the months ahead.

The United States, Canada's largest trading partner, chalked up a second-quarter growth rate of only 1.5 per cent.

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"That's definitely going to weigh on the Canadian export sector going forward," said Diana Petramala, an economist at Toronto-Dominion Bank.

Combined with recession in parts of Europe and growth in India and China that has slowed to three-year lows, the outlook of export demand is not good.

Since the beginning of the year, Canadian export levels have largely stagnated.

There has been weakness in energy exports, both in terms of price and volume, though the energy sector might be the lone source of strength in the Canadian economy moving forward.

In fact, a 0.6-per-cent increase in mining and oil and gas extraction offset the 0.5-per-cent decline in manufacturing in May.

"There's a lot of interest in the Canadian resource sector," Ms. Petramala said.

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"We're seeing a lot of foreign investment, and that should help drive activity."

CNOOC Ltd.'s recent $15.1-billion bid for Calgary-based oil producer Nexen Inc. is the latest example of that.

The hope is that strength in the resource sector can temper weaker consumer spending.

While retail sales were a bright spot in May, the 0.7-per-cent volume increase didn't completely reverse a 0.9-per-cent decline in April.

Employment gains early in the year didn't lead to any pickup in spending.

Ms. Petramala said household debt will act as the major constraint to the economy going forward.

"[People are] clearly heeding the warnings from the Bank of Canada to be cautious about the debt they're taking on," Ms. Petramala said.

The federal government's new mortgage rules are likely to constrain spending in as far as they limit household debt; the rules are also likely to weigh on sectors tied to housing and household lending, but will also constrain consumer spending in so far as they limit household debt, but will also constrain consumer spending in so far as they limit household debt, Ms. Petramala said.

Mr. Shenfeld also said these new rules are putting a damper on business for real-estate agents, which contributed to the small 0.2-per-cent rise for the heavily-weighted financial sector in May's GDP report.

This is "a sign of things to come," he said.

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